One On One With Dr. Lawrence Meyer, vice chairman, Macroeconomic Advisers
Tuesday, April 18, 2006
|
|
|
|
SUSIE GHARIB: Joining us now with more analysis of the Fed and the markets, Dr. Lawrence Meyer, vice chairman of Macroeconomic Advisers and a former governor of the Federal Reserve. Larry, nice to have you on the program.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: Glad to be here.
GHARIB: When you read through the minutes, what was your take on it? Is it the same as the basic market reaction was that we are close to the end and may will be the last hike?
MEYER: Yeah, I think there are really two things. The first thing is that the committee thinks it is close to the end of the cycle and that future moves will just depend upon the data. But the second is, they have a view about what that data is going to be. They think it`s going to confirm that the economy is slowing to a more sustainable pace, that inflation is still well-contained and under those circumstances they are likely to stop after one more move to five percent.
GHARIB: Let`s talk about the data because they did say that it`s going to be basing it on new data. What data do you think the Fed and in particular Ben Bernanke and over the years we`ve seen what data that Alan Greenspan, what were his favorites. What are Ben Bernanke`s favorites?
MEYER: There`s no one magic piece of data. You are looking at the spending, the buoyancy of spending on the part of households and businesses, data like retail sales, non-defense capital goods orders. You are looking at the strength of the labor market. So those are the three pieces of data that are probably the most important, getting a sense that the economy is slowing to a more sustainable rate and also watching the readings for core inflation, the core CPI and core PCE numbers. Those will be the numbers that will be most important.
GHARIB: In the minutes the sense from most of the members was that they see that inflation isn`t going to really move that much higher. Is that your view on inflation as well?
MEYER: Well, we think that inflation is probably going to rise very gently but remain modest over the next couple of years. So we think inflation is probably on a bit of a cyclical uptick because we think the economy has moved a bit beyond full employment. But clearly, the committee is less concerned about that. They think they`re right about at full employment, in the vicinity of full employment and they think inflation is going to stay about where it is.
GHARIB: What about rising commodity prices? You just heard our report, oil prices are at a new record high and some people see they`re going to go higher and that this is going to impact inflation. What`s your view?
MEYER: First of all, there`s a difference I think within the staff and the committee. The staff has been worried for some time that we might get a temporary blip in core inflation as these commodity and energy prices got passed through the core. We think that`s less likely and so we think inflation`s going to stay about where it is. But even the staff that thinks there`s going to be a slight increase in inflation as this happens thinks it is temporary and that inflation is going to recede into next year. So it`s a pretty benign view of inflation all around.
GHARIB: So what are the risks here? What could happen that might change the course that the Fed is on right now. That after that May meeting that would force the Fed to raise interest rates again? What could change?
MEYER: Well, the most likely outcome that would be different would be that growth would stay stronger for longer, instead of growth slowing to maybe 3 1/2 percent in the second quarter it would continue growing at 4 percent rate or better, that the unemployment rate continues to decline and the committee would be more concerned that labor markets were getting tight to the point where inflation pressures would be more likely. That would certainly encourage them to tighten again.
GHARIB: Real quickly, we are at the end of our segment here. You`ve served on the Fed as a governor. Is the Fed doing the right thing here to stop that in May at 5 percent?
MEYER: If the data unfolds as they expect, I think absolutely.
GHARIB: All right. Thank you very much, Larry. Nice to have you here.
MEYER: Absolutely. My pleasure.
GHARIB: We`ve been speaking with Dr. Lawrence Meyer, vice chairman of Macroeconomic Advisers.
